Another Rate Cut From the Fed

Published: December 12, 2001

An economic recovery may be on the horizon, but don't expect things to get frothy any time soon. That was the Federal Reserve Board's message to financial markets yesterday, as it cut overnight interest rates yet again, this time by a quarter of a percentage point. It was the 11th cut this year, bringing the rate down to 1.75 percent, below the rate of inflation and its lowest level in more than four decades. While noting that the economy remains soft, the central bank also indicated, for the first time, that it sees signs that the slump may be ending.

Once the current recession is over, Americans may be in for a period of lackluster growth. Lingering hopes for a dramatic ''V-shaped'' recovery, whereby the economy rockets back to its torrid late-90's pace, seem unrealistic. In an effort to stem the recent rise in longer-term interest rates, the Fed noted that inflation is likely to edge even lower.

The current recession is unusual because it was precipitated by a slowdown in capital spending by overextended businesses, instead of by weakening consumer demand. Indeed, under the circumstances, consumer spending has held up relatively well. Capitalizing on interest-free loans offered by car makers, consumers made October the best month ever, improbably enough, for vehicle sales.

All this means that the recovery anticipated by Wall Street, when it comes, may be lackluster. Business investment may pick up, but there will not be the kind of pent-up consumer demand associated with robust recoveries. The economy may drift, even as it ceases contracting.

Last Friday the Labor Department reported a loss of 331,000 jobs during November. The jobless rate rose to 5.7 percent, the highest level in six years. Even forecasters who expect a rebound in the first half of next year anticipate the number of jobless to grow further.

The Fed's rate cuts this year did not stave off a recession, but they most likely made it less severe. Congress, distracted by the Republican agenda to cut taxes on the very rich, has so far failed to provide an equally meaningful stimulus. When it does, its first priority ought to be relief for the unemployed and low-wage earners, those who may be in for a rough ''recovery'' in 2002.